You don't have to sand all the varnish off, just the blistered paint. I agree with your analysis of the problem. You can sand the paint off, repaint, then put a couple of coats of varnish over that to seal it in, but ONLY after the recommended paint curing times, and check for compatability as well. That's how I did my lettering on my boat. The lettering went on after a few coats of varnish, then the other coats were applied over that. This will smooth out any ridges where the paint lines end and give the boat a smoother look, especially if you wet sand the final coat and buff it.

Malcolm